by Lowell Kalapa, Tax Foundation of Hawaii
For more than a dozen years now, lawmakers have been touting the tax credit bandwagon, arguing that without these tax incentives, Hawaii’s economy would stagnate and there would be no new jobs for Hawaii’s people.
So it comes as no surprise that lawmakers are once again hard at work trying to stimulate the economy by adopting tax credits for film productions, for alternate energy devices, agricultural feedstock, research and biofuel production. These tax incentives hold the potential of draining hundreds of millions of dollars from the state treasury, the state treasury from which also is drawn the funds to pay for state programs and services.
Since lawmakers have not made concurrent reductions in state services and programs, it means that lawmakers will have to look at all other taxpayers to make up the funds that will be handed out in tax credits and other types of tax incentives. It is this point that seems to have been lost on legislators, that these tax incentive programs are nothing more than another expenditure of taxpayer dollars. Thus, adopting tax incentives for film production or high technology research is the same as spending on domestic violence programs or classroom teachers. So while constituents bemoan the loss of services due to cutbacks in the state budget, they rally behind tax incentives to encourage film production or high technology research and development.
The same can be said on the county level where various groups that enjoy exemptions from the real property tax protest suggestions that those exemptions be repealed or scaled back. In the case of the credit unions that vehemently protested the idea that the exemption for credit union property be eliminated citing the potential reduction of services and interest earnings for their members, no one seems to acknowledge that by preserving the exemption, the rate on homeowners has to be maintained or increased. Thus, the members of that credit union who are homeowners are picking up the tab for their credit union’s exemption.
In the world of tax policy analysts, the narrower the base of a tax, the higher the rate has to be for those taxpayers who remain in the base. That is one of the beauties of the general excise tax. Since the base of the general excise tax is so broad with very few exemptions, the tax rate can remain relatively low by comparison to the rates of retail sales taxes found on the mainland. That is because every transaction is subject to the general excise tax, including services that under the retail sales tax scheme are not usually taxed.
Thus, carving out special preferences for certain taxpayers results in a shift of the tax burden to those who are not afforded the same break. Creating tax incentives or tax credits has the same effect, that is, shifting the burden of paying for government services and programs to taxpayers who are not afforded the same tax break. Although lawmakers have been reminded of this fact over and over again, they continue to believe that such tax incentives are crucial to the diversification of Hawaii’s economy. Never has any lawmaker asked why such tax incentives are necessary to attract activities, such as film production or high technology activities, nor have they asked who is going to pay for these give aways.
Neither have lawmakers asked who is going to make up for the loss of revenues when these tax incentives are claimed. Who is going to pay for the education of Hawaii’s youth when those tax revenues are handed out to these specific activities? No, lawmakers argue that if those tax incentives are not granted, those folks won’t come to Hawaii, research will be conducted elsewhere, and no one will want to build a biofuel production facility to help make Hawaii energy independent. On the other hand, lawmakers bemoan the “brain-drain” as more and more of Hawaii’s youth – Hawaii’s future - do not return to Hawaii and even more decide to leave for more affordable mainland locations.
Does it ever strike lawmakers that Hawaii’s high burden of taxes and its overly regulated environment make Hawaii a place that few can afford? Has it ever crossed a lawmaker’s thoughts that many of the laws they approve each year make Hawaii one of the most expensive places to live? And what have lawmakers done to reduce the cost of living and doing business in Hawaii?
For all of the hoopla around these tax incentives and tax credits, someone needs to remind lawmakers that they come as an expense to all of us unlucky taxpayers who just happen not to be blessed with such tax breaks.